Bigger Than Most

INTRODUCTION

Failures of BDC-financed companies – whether in the form of bankruptcies, out of court restructurings or outright liquidations – happen all the time. After all – going by Advantage Data‘s count – there are nearly 10,000 private and public companies at least partly financed by one or more BDCs and all are highly leveraged, non-investment grade credits. Even if 2% fail, that’s 200 a year – almost one every business day. Over at the BDC Credit Reporter these credit troubles are our bread and butter business which we write about daily, attempting to track the largest and worst offenders in order to assess the ultimate impact on future BDC earnings and net assets.

Once in a while, credit failures occur of a sufficient size and import to be worthy of being covered in the BDC Reporter as well. That’s clearly the case with the just announced bankruptcy of First Brands, a huge automotive supplies conglomerate which sought court protection on September 28, 2025. First Brands has been – and will remain – in the news because of the huge amounts involved: $10bn or more. Moreover, this bankruptcy follows the recent collapse of sub-prime auto lender Tricolor, also grabbing headlines.

On September 4, 2025, Tricolor abruptly shut down many dealership operations, leaving employees and customers locked out with little explanation. Six days later, on September 10, the company filed for Chapter 7 bankruptcy liquidation rather than attempting to restructure. The bankruptcy filing listed between $1 billion and $10 billion in both assets and liabilities, with more than 25,000 creditors

Source: CarPro -September 18, 2025

As often happens in these situations, financial commentators are jumping on these seemingly related setbacks to worry about the broader health of the economy; the automotive sector and private credit. Maybe this is justified – and certainly makes for good headlines – but there’s also a risk of causing unnecessary panic. What we can offer is a survey of the involvement of the BDC sector – both public and private – in First Brands and our assessment of the likely impact on the BDCs involved. (BTW, there is no known BDC exposure to Tricolor).

Not to re-invent the wheel we are re-publishing key excerpts from our two articles about First Brands published in the BDC Credit Reporter and following up with our Views thereafter.

ANALYSIS

First Mention

First Brands Corp: Subsidiaries Filing For Bankruptcy – September 25, 2025

“Ouch! All of a sudden this very large, BDC-financed automotive company is in deep financial trouble. Several of its subsidiaries have already filed for Chapter 11 and the parent is headed there as well and with “No Plan in Place” as Bloomberg‘s headline yesterday screamed out.

Auto-part supplier First Brands Group LLC is preparing to enter bankruptcy with no restructuring plan in place, a sign of how quickly the company’s fortunes are unraveling, according to people familiar with the situation.

It’s unusual for companies as big as First Brands to file for Chapter 11 without a restructuring support agreement with lenders in hand. But the firm is running out of cash, and creditors have been unwilling to give it more money to keep its operations going without court protection, according to the people, who declined to be identified because the negotiations are private.

Here is a link to a summary of the company’s operational and financial challenges but with this collapse happening in real-time expect to learn a great deal more in the days ahead.

Unfortunately, BDC exposure is extensive but not necessarily from the players one might have expected. Going by Advantage Data’s records – as of the IIQ 2025 – total exposure at cost – both in first and second lien debt – amounted to $224mn. There were 14 BDCs involved including many non-traded players and 4 public BDCs: Prospect Capital (PSEC); Palmer Square (PSBD); Great Elm (GECC) and PhenixFin (PFX).

Confoundingly, as of mid-year 2025, the BDCs involved had applied very modest discounts to their loans: no more than (9%), with some even valuing the debt at a premium. With the benefit of hindsight these generous values are at variance with what had been happening for a year and a half:

The first significant red flag emerged in March 2024 when Fitch Ratings downgraded First Brands from ‘BB-‘ to ‘B+’, marking the company’s initial descent into deeper junk territory. This downgrade occurred approximately five months before the more widely publicized refinancing crisis. Around the same time, S&P Global called for further improvements to disclosure rules regarding supplier finance arrangements, highlighting growing regulatory scrutiny of off-balance sheet financing practices that First Brands relied heavily upon.

Throughout 2024, credit rating agencies expressed increasing concern about First Brands’ aggressive acquisition strategy and mounting leverage. The company’s debt-to-EBITDA ratio had climbed to concerning levels, with some analysts suggesting it exceeded 10x, far above the 6x threshold typically considered acceptable for investment-grade firms. The company’s revenue had grown from $1 billion in 2020 to $4 billion by 2024 through debt-funded acquisitions, creating a precarious financial structure.

…

For the moment, we are downgrading First Brands to a corporate credit rating of 5 from a 2 – from “performing as expected” to “non-performing and permanent loss expected”. We are estimating the ultimate loss could be in the 75%-100% range and more than ($25mn) of annual interest income could be forgone – possibly forever.

Far and away the public BDC most in the line of fire is PSEC with nearly $60mn in exposure – both in first and second lien. GECC has committed $25mn – a large amount for BDC of its size whose strategic focus is elsewhere. PFX – a micro BDC – has exposure of $4mn. The only public BDC really targeting this segment of the market is PSBD which lent out $12mn in first and second lien debt – thankfully in a size that should not cause too much damage”.

BDC Credit Reporter – September 25, 2025

Second Mention

Over the week-end, First Brands took the anticipated action, as we covered this morning in a second article:

First Brands Corp: Files For Bankruptcy – September 29, 2025

“Now – to no one’s surprise – First Brands itself has followed suit, filing for Chapter 11 on September 28, in Texas. Here’s the most worrying headline: the company reported liabilities estimated between $10 billion and $50 billion against assets valued at $1 billion to $10 billion.

Although First Brands had no pre-agreed plan in place with its multiple creditors, a $1.1bn Debtor-In-Possession (DIP) loan has been arranged as part of the filing. The identity of the lenders supplying the DIP monies is “confidential” and is said to consist of an “ad hoc group” of “the company’s existing first-lien lenders”. 9Fin reports:

Advisors to a group of First Brands’ creditors initially reached out to lenders with $100m or more in holdings.

This could be important from our perspective as no single BDC has anywhere near $100mn in exposure. This could be a good news-bad news situation. On the positive side, no more than the existing $224mn in aggregate BDC exposure – spread over 14 players – will be going down the First Brands black hole. On the other hand, the terms of the DIP highly favor the new lenders. This includes existing debt held by the DIP lenders having “portions of their current loans rolled up into the DIP facility” providing enhanced recovery prospect. This will create a two tier recovery for first lien lenders. No wonder that some first lien lenders appear to have hired counsel on concerns that they are being excluded from the DIP.

All of the above confirms our suspicions that an eventual loss of 75%-100% of BDC exposure remains a likely scenario. We continue to rate the company as a 5 on our 5 point scale and given the $217mn aggregate FMV this is treated as a “Major” Important Underperformer – i.e. with a value north of $100mn. However, you can be certain – whichever way the creditors and the courts skin the cat – above average losses in BDC capital and income will be forthcoming shortly.

Moreover, given the size of the failure; the automotive brand names involved and the prospect that there is much more to learn about how the business was financed expect to see many more articles in the mainstream financial press on the subject. This is likely to be accompanied by broader concerns about the financial health of the private credit market and the financial markets more generally. Here is an example from Bloomberg, drawn from the journalists clippings:

The collapse of First Brands plays into longstanding concerns about companies’ usage of supply-chain financing to create debt that often remains off the balance sheet. The practice was at the center of the collapse of Greensill Capital and contributed to the demise of Credit Suisse Group AG“.

BDC Credit Reporter – September 29, 2025

VIEWS

Dodged The Bullet

Unlike recent major credit reverses like Pluralsight – BDC exposure $800mn+ – none of the BDCs targeting the upper middle market were in the ranks of the BDC lenders to First Brands.

While Ares Capital (ARCC); Blue Owl (OBDC); Goldman Sachs BDC (GSBD) and BlackRock TCP (TCPC) – to name a few – were involved in the flawed Pluralsight deal, none have been caught up in the First Brands net even though this was an upper middle market borrower.

Does that reflect good credit underwriting – which is much more a matter of which loans you don’t book than those you do?

Possibly.

Bite Size

The BDCs that did choose to lend to First Brands – which began in 2021 when the current 2027 and 2028 first and second lien loans were booked – have mostly been disciplined about the extent of their exposure.

Diversification is a key strength in credit and most BDCs tend to not buy off more than they can chew.

PSBD – for example – kept its exposure to under $12mn: 1% of its total portfolio and 2.4% of its net assets.

Likewise PFX’s loan amounts to only 1.3% of its portfolio, but 5.5% of its net book value.

Less exemplary is GECC which advanced $29mn, 7% of its portfolio and 21% of net book value at the end of June 2025.

As mentioned in our BDC Credit Reporter articles, PSEC has the greatest amount invested of any public BDC: $59mn.

To be fair – when we do the numbers – PSEC’s exposure is under 1% of its portfolio and 2% of its net book value – a little better than GECC in relative terms.

However, PSEC – unlike all the other BDCs mentioned – has a plethora of other credit problems to contend with.

In Passing

We can’t noticing how many non-traded BDCs there are caught up in the First Brands imbroglio: 10 by our count.

This segment of the BDC market, that we don’t cover because there seems to be no interest from readers and investors, has attracted a huge amount of new capital in recent years.

The public side of the BDC market has grown robustly but the private side is expanding at an even faster pace.

The question which follows is whether all that new money burning a pocket in many new BDC funds can find an appropriate home?

Or are non-traded BDCs forced by circumstances to “take a flyer” on riskier credits like this one at First Brands turned out to be?

We don’t have the answer but we’re curious as to whether credit write-downs and realized losses in the private BDC world are exceeding those in the public niche we cover.

Finally

It’s early days the markets to weigh up whether the First Brands bankruptcy will have a broader resonance in the credit markets.

Much will be uncovered by the trustees in the weeks ahead about where the bodies are buried and who might be holding the proverbial bag – to mix two metaphors.

We suspect, though, there will be no “contagion” in the financial markets and nothing but a sour taste in the mouth of the few public BDCs involved.